Some netiquette for this

Lecture...
 We want to see and hear you.

 When you're not speaking, please mute your

microphone.

 When you want to contribute by talking on the

microphone, please raise the hand icon or get
our attention in the chat.

 We strongly encourage your participation using

the chat, reactions, or the microphone.

 Very importantly, try and be in class!

Participation, engagement and practice are
requisite sine qua non for success in FINA1141.
International
Business
Finance

(FINA1141)

Topic 10 - Sustainable
Finance: Environment,
Social and Governance
factors (ESG) in the
financing of investment
Learning objectives
 Analyse the limitations of the ‘Classic/Traditional’ firm value conceptual
framework.

 Evaluate the importance of Environmental, Social and Governance factors in the

financing of investment.

 Assess the managerial aspects of ESG and Socially Responsible Investment

(SRI).
 THE CLASSIC/TRADITIONAL’ FIRM VALUE CONCEPTUAL
FRAMEWORK AND ITS LIMITATIONS

Before the advent of Environmental, Social, and Governance (ESG) criteria,

the traditional approach to assessing firm value focused predominantly on
financial metrics and performance indicators. Key elements included revenue
and profit margins, earnings per share (EPS), return on equity (ROE), return
on assets (ROA), stock price, market capitalization, price-to-earnings (P/E)
ratio, debt-to-equity ratio, current and quick ratios, operational cash flow, and
cost management. Additionally, strategic positioning through market share
and product innovation, as well as corporate governance related to board
structure and compliance, were considered important.
However, this classic approach had notable limitations, as it often overlooked
the broader impacts of environmental degradation, social responsibility, and
governance issues. Environmental impacts such as carbon footprints, social
responsibilities like labour practices and community engagement, and proactive
governance practices for transparency and ethics were not sufficiently
accounted for. Consequently, while traditional metrics provided a
comprehensive view of financial health and operational efficiency, they missed
critical aspects that contribute to long-term sustainability and risk management.
 IMPORTANCE OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE
FACTORS IN THE FINANCING OF INVESTMENT.
Environmental Factors:
1. Regulatory Compliance and Risk Management:
o Environmental factors such as carbon emissions, waste management, and
resource usage are increasingly regulated globally. Companies that manage these
risks effectively can attract investment by demonstrating compliance with
environmental laws and mitigating potential liabilities.
2. Long-term Sustainability:
o Investors are increasingly considering the long-term sustainability of companies
regarding environmental practices. Companies that adopt sustainable practices
not only reduce operational costs but also enhance their reputation and
attractiveness to investors focused on long-term value creation.
Social Factors:
1. Corporate Social Responsibility (CSR):
o Companies that prioritize social factors such as labour standards, community
engagement, and diversity often enjoy enhanced brand reputation and consumer
loyalty. This can translate into lower risk premiums on financing and better
access to socially responsible investors.
2. Employee Satisfaction and Productivity:
o Companies that invest in social factors like employee welfare, health and safety,
and training programs tend to have higher employee satisfaction and
productivity. This can reduce turnover rates and enhance operational efficiency,
ultimately improving financial performance and attractiveness to investors.
Governance Factors:
1. Risk Management and Transparency:
o Strong governance practices encompassing board independence, transparent financial
reporting, and robust risk management frameworks reduce the risk of financial scandals and
mismanagement. Investors prefer companies with strong governance structures due to lower
risk exposure.
2. Shareholder Rights and Accountability:
o Good governance includes protecting shareholder rights, aligning executive compensation
with performance, and ensuring accountability to stakeholders. Companies with effective
governance practices are more likely to maintain investor trust and attract capital.
3. Access to Capital:
o Companies with strong ESG performance are increasingly favoured by institutional
investors and lenders who integrate ESG criteria into their investment decisions. This
enhances access to capital markets and may result in better financing terms.
In conclusion, Environmental, Social, and Governance factors play a crucial role in
the financing of investments by influencing risk management, competitive
positioning, access to capital, and long-term value creation. Integrating ESG
considerations into investment decisions not only aligns with ethical and regulatory
expectations but also enhances financial performance and resilience in a rapidly
evolving global economy.
 Managerial aspects of ESG and Socially Responsible Investment (SRI).

Managerial Aspects of ESG

1. Strategy Integration:
o Managers must integrate ESG criteria into the company’s overall strategy,
ensuring that sustainability goals align with business objectives.
o This involves setting measurable ESG targets and incorporating them into
performance evaluations.
2. Risk Management:
o ESG considerations must be factored into the company’s risk management
framework to identify and mitigate potential environmental, social, and
governance risks.
o Managers need to assess and address ESG-related risks such as climate
change, regulatory compliance, and social impacts.
3. Stakeholder Engagement:
o Effective management requires ongoing dialogue with stakeholders,
including employees, customers, investors, and communities, to understand
their concerns and expectations.
o Managers must ensure transparent communication of ESG initiatives and
performance.
4. Reporting and Transparency:
o Managers are responsible for accurate and comprehensive ESG reporting,
adhering to recognized frameworks like GRI, SASB, or TCFD.
o Transparent reporting helps build trust and demonstrates accountability to
stakeholders.
 Socially Responsible Investment (SRI)

1. Investment Screening:
o SRI involves screening investments based on ESG criteria, excluding
companies that do not meet certain ethical or sustainability standards
(negative screening) or actively seeking out companies with strong ESG
practices (positive screening).
2. Impact Investing:
o Investors focus on companies and projects that generate measurable social
or environmental benefits alongside financial returns.
o This approach aims to create positive change in areas such as renewable
energy, affordable housing, or community development.
3. Shareholder Advocacy:
o SRI includes engaging with companies as active shareholders to promote
better ESG practices.
o This can involve voting on shareholder resolutions, engaging in dialogue
with company management, and participating in shareholder meetings.
4. Performance Measurement:
o SRI emphasizes the importance of measuring and reporting on the social
and environmental impact of investments.
o Investors use various metrics and frameworks to assess and communicate
the effectiveness of their investments in achieving ESG goals.
In summary, the managerial aspects of ESG focus on integrating sustainability
into business operations, risk management, stakeholder engagement, and
transparent reporting. Socially Responsible Investment (SRI) involves screening
investments based on ESG criteria, impact investing, shareholder advocacy, and
measuring performance to achieve both financial returns and positive social or
environmental impact.